Chart shows why it is better to start an SIP at the top of a market cycle

The report is based on a detailed analysis using long-period data of S&P BSE Sensex TRI (last 27 years) and considers all those periods when equity market has fallen more than 20% from its top.

While the percentage return is marginally higher for SIPs started at the bottom of the market cycle, the absolute gain in rupee term (wealth creation) is far higher for SIPs that began at the top, revealed a study by WhiteOak Capital.

The report is based on a detailed analysis using long-period data of S&P BSE Sensex TRI (last 27 years) and considers all those periods when the equity market has fallen more than 20% from its top.

 The below table refers to an investment summary of two investors, one who started a Rs 10,000 monthly SIP at the Top of various market cycles and the other at the Bottom:

For example, if someone had started a monthly SIP of Rs 10,000 in S&P BSE Sensex TRI during January 2008 (at the peak of market cycle six as per the above table), as of 30 September 2023, they would have invested Rs 18.9 Lakh and the current value of this investment would have been Rs 58.5 Lakh at an XIRR of 13.2%. Similarly, if somebody had started this SIP in March 2009 (at the bottom of market cycle six as per the above table), as of September 2023, they would have invested Rs 17.5 lakh (Rs. 1.4 Lakh less than earlier investor) and the current value of this investment would have been Rs 49.8 Lakh (Rs. 8.7 Lakh less than earlier investor) at an XIRR of 13.3%.

Which Date to Select for Monthly SIP?

Start of the Month? End of the Month? Middle of the Month? White Oak tried answering these commonly asked questions using long-period data from S&P BSE Sensex TRI (a widely tracked Indian Equity Market Index). The study of the last 26 years' index data reveals no meaningful difference between the average return of different dates’ 10 Years SIPs.

10 Years Average SIP Return (% XIRR) on Daily Rolling Basis for a particular date of the month for S&P BSE Sensex TRI between Sep 1996 to Sep 2022. Past performance may or may not be sustained in future.

A historical data analysis provided below suggests that, in the long term, it hardly matters if the investor invests via Daily, Weekly, or Monthly SIP Frequency. All three frequencies end up generating somewhat similar returns (% XIRR). The key takeaway from the analysis is to focus on investing a small amount regularly for the long term.

"A successful SIP is more about “Starting Early”, maintaining the discipline of “Investing Regularly”, investing for “Long Term” to achieve our “Financial Goals” and less about “Which Date”, “Which Frequency” etc," noted the study.

Large Cap, Mid Cap or Small Cap SIP?

An average Large Cap stock is generally less volatile than an average Small and Mid-Cap stock and provides stability to the portfolio. However, the Small and Mid-Cap (SMID) segments may offer many opportunities for potential higher growth in the long run. The study reveals that, among the three market cap segments, Mid Cap Segment was a good investment option for investors seeking to invest via the long-term SIP route.